This Gigantic VIX Trade Could Be A Big Deal

| June 5, 2015 | 0 Comments

Big DealThis Gigantic VIX Trade Could Be A Big Deal

With the summer doldrums kicking in for the US financial markets, it’s normal to expect volatility to be low for the next several weeks.  Of course, you never know what may happen.  But, the summer is typically a slower period for financial news.

The financial media tends to amplify smaller moves and less important news in order to make this traditionally less exciting period a bit more interesting.   As an investor/trader, you have to be a bit more careful about whether market action is true volatility, or just something drummed up by bored media members.

Of course, the best way to get a good idea of true market volatility is by following the VIX.

The VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  As you probably know by now if you’re interested in options trading, overall market volatility is most commonly tracked by watching the VIX.

If you’re interested in learning more about the VIX, the CBOE VIX mini-site has a ton of valuable information on the index.  Follow the link if you want to learn more.

Trading volatility – or volatility products – has become extremely widespread.  It’s true for options traders of course.  But, even those traders who never touch options may still trade (or at least follow) volatility levels.

I’ve written plenty about volatility, so I’m not going to rehash it here.  However, feel free to check out this article to learn more about why volatility is important.

Okay, so with all that being said, let’s take a look at a very interesting and unusual VIX trade from this week.  It could give us some clues as to what to expect from stocks over the next few weeks.

Check this out…

A trader purchased 200,000 VIX calls in June and July this week.  Yes, 200,000… that’s not a misprint.

The purchase was for 100,000 June 20 calls and 100,000 July 20 calls.  The total cost of the trade was $1.26 for both options.  In other words, the trader spent over $25 million on the trade!  That’s about as much cash as you’ll ever see dropped on one options strategy.

Okay, so what’s the story with this VIX trade?

Here’s the chart from the day the trade occurred:

large trade in VIX options, a chart of VIX

Looking at the chart, the VIX has recently made a strong move above the 50-day moving average.  The index had made several attempts to break through this key support line without success.   So, this recent surge may be meaningful.

Basically, given how slow the summer has been (and typically is historically), the sharp move higher could be a sign volatility is headed higher.  There is a fair amount of geopolitical risk to be found, especially related to Greece.

So, given the recent history, how likely is it this VIX trade will be a winner?

The VIX would need to end up above $20(ish) in June or around $21 or higher in July in order for this trade to be profitable.  However, with 200,000 calls, it doesn’t have to go that high in order for the trade to make big bucks.

However, I’m not inclined to believe that volatility is going to remain high.  We may see a spike, but it will almost certainly revert to the mean.  The Greece problem most likely won’t end in a catastrophe, if recent history is any guide.

Instead, this massive trade is most likely a hedge against a substantial long portfolio.  It’s clearly an institutional trade, and seems too expensive to be pure speculation.  Remember, many institutions use the VIX to hedge their portfolios these days (rather than SPX options).

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.